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Important Update: Changes in FDIC Deposit Insurance Coverage

The FDIC deposit insurance rules have undergone a series of changes starting in the fall of 2008. As a result, certain previously published information related to FDIC insurance coverage may not reflect the current rules. For details about the changes, visit Changes in FDIC Deposit Insurance Coverage. For more information about FDIC insurance, go to www.fdic.gov/deposit/deposits/index.html or call toll-free 1-877-ASK-FDIC (1-877-275-3342). For the hearing-impaired, the number is 1-800-925-4618.

Summer 2006 – Start Smart: Money Management for Teens

Getting a Loan: A Responsibility to Be Taken Seriously

Borrowing money can be a great way to buy something now and pay for it over time. And yes, there are ways for a teen to borrow money. But there are some important things to remember if you borrow money. One is that borrowing usually involves a cost called "interest," which is the fee to compensate the bank or other lender when you use their money. This is the reverse of what happens when the bank pays you interest to put your money in the bank.

Also, when you borrow money you are promising to repay the loan on a schedule. If you don't keep that promise, the results can be very costly—either in late payments you'll owe or in damage to your reputation, which means you could have a tougher time borrowing money in the future.

Here are some of your options...and important considerations.

For many teens, their first lenders are their parents. If your parents are willing to lend you money, they probably will set repayment terms (how much to pay back and when). They also may require you to pay more money than you borrowed, as a bank would do when it lends people money and charges interest.

You may be able to get access to a credit card or bank loan. Under most state laws, for example, you must be at least 18 years old to obtain your own credit card and be held responsible for repaying the debt. If you're under 18, though, you can qualify for a credit card along with a parent or other adult.

If you and your parents are comfortable with you having access to a credit card, there are cards designed just for teens. One is a credit card with a low credit limit (maximum amount you can borrow), which can keep you from getting deeply in debt.

An alternative to buying with a credit card is to use a debit card, but this also comes with costs and risks. A debit card allows you to make purchases without paying interest or getting into debt because the money is automatically deducted from an existing savings or checking account. Again, if you're under 18, you may qualify for this card with a parent or other adult.

One example of a debit card that may be appropriate for teens 13 and older is a pre-paid card that carries a certain value from which purchases are deducted. This kind of debit card isn't linked to your bank account. Instead, just like with a pre-paid telephone plan, there is a limit on how much you may spend.

Keep in mind that many debit cards have fees that can add up quickly, so make sure you ask about fees before using a debit card. Also, because a debit card can provide a thief easy access to an account, you need to protect your card and any PINs (personal identification numbers) that go with it.

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Last Updated 08/18/2006